The invisible hand of government in cedi depreciation

By: Jerry.J.Afolabi

As the normal principle of economics says, when a domestic currency depreciates it makes the prices of goods and services decline compared to the international prices.

This causes an increase in exports and makes it competitive which will eventually increase production and employment to surge growth in the entire economy. Unfortunately, it is not the case in Ghana. We have experienced steep depreciation of the cedi over the past five years, a massive decline in export and a slow economic growth over the last few years.

This is as a result of dollarization of our economy, mismanagement of resources, high demand for dollar for importation and low exportation.

It is important to mention the demand and supply factors that also influence the depreciation of a currency. Our country is faced with high demand for Dollars to meet the following: bills payable (imports), huge capital transfers, royalties to international bodies, transfers by multinationals to their head office and subscriptions to international bodies.

However, the supply is not enough to balance the equation since there has been little effort to increase exports. Remittances over the few years have also declined significantly since the global economy is not doing very well. For the grants, loans, and dividends we have seen massive mismanagement and corruption erode them all. This write-up seeks to indicate some of the main government actions and policies that contribute to the depreciation of the cedi and recommends possible ways to address the situation.

Government’s Actions

The main government action that has caused the continuous depreciation of the cedi is the excessive over-the-ceiling borrowing by the government in foreign currencies leaving the deficit high and weakens our local currency.

The Ghanaian public debt to GDP stood at 71.9% ($30.1 billion) as at November 2016 according to the central bank. Previous governments embarked on borrowing for developmental projects and for other several other purposes. The recent past government came under huge attack and criticism for mismanaging the borrowed funds. The high-interest payments on these loans have made it very difficult for the funds needed to be made available for private sector growth reduced. Gross Domestic Products (GDP) targets are not met simply because the economy is weak as a result of the weak currency.

Again, governments inability to enforce the restrictive policies on the importation of goods like rice and sugar, tomato paste, old refrigerators, chairs and other food ingredients, results in high inflation and subsequently causes the cedi to depreciate.

The policies governing importation are so relaxed that almost everything we used in Ghana is imported. The other issue is the inability of the local industries to produce these products at a competitive price and quality due to the high cost of production. Since inflation is inversely proportionate to currency, as inflation figure increase the currency depreciates and the vice versa. The balance of payment of our country has continuously seen importation outweighing export and this is one reason why the cedi keeps depreciating.

Furthermore, the rapid depletion of the country’s foreign reserves by the government is one crucial factor that has caused the cedi to lose value over the years. Past governments have used the foreign reserve as a back up to solving the depreciation of the cedi without continuous effort to increase exportation to make up for the difference. The surge in the power crisis (DUMSOR) over the last few years eroded investor confidence in the country which resulted in most investors selling off their investment and repatriating them to other countries. This is the reason why the last two years saw a heavy depreciation of the cedi worsening the exchange rate in the country.

The Cedi against the Dollar

The cedi over the years has seen continuous depreciation which is very worrying and as a country, we need to find a lasting solution to this perennial problem that confronts us. Once a white investor asked me a question and I quote “Must your country always experience steep depreciation of the cedi every last quarter of election year and most often the first quarter of every year” I told him it is mismanagement and misplaced priorities as a country that cause this problem.

The year-to-date Ghana cedi depreciation to the dollar now stands at 24.57 per cent, as at March 1, 2017. The table below shows the rate of depreciation of the cedi to the dollar from 2014.

Year Rate of Depreciation (%)

Mid 2014 27.99
End 2014 32.45
Mid 2015 26.20
End 2015 15.65
Mid 2016 3.34
End 2016 9.65

Some Recommendations to Government

There are several ways government can manage/control the depreciation of the cedi. Most importantly the complete implementation and monitoring of policy progress is what brings the results needed. The effective implementation will set the cedi on a strength path for a stable economy.

First of all, the government should institute a policy directive to all the ministers appointed to lobby for foreign investor/investments to invest into the local institutions/companies and government bonds under their ministry. The finance minister and central bank governor should collaborate with foreign central banks to invest in government bonds locally.

Secondly, the government through the central bank and parliament should issue a white paper signed off by all stakeholders to halt all local payment transactions that are made in the major trading currencies especially to end the dollarization of our economy.

There shouldn’t be any local company/institution/organization, multinational or group of individuals and individuals that price or render service in the country in any of the major trading currencies. This white paper must have clearly spelt out sanctions. Example; withdrawal of company registration certificate and huge cash penalty. Every transaction and payments must be made in cedi to boost the confidence in the economy and strengthen the cedi against the major trading currencies.

Thirdly, government’s Fiscal expenditure must be controlled/minimized. The government should prioritize its expenditure and block all the loopholes in the economy. Over the years government officials have taken advantage of the leakages in the economy to enrich themselves and perpetuated corrupt activities. There should be watchdog machinery in place to curb all these corrupt activities.

There should be proper mechanism in place to manage information since some events/news/information can cause massive surge or erratic whipsaw action in the trading market to affect the cedi.

Lastly, massive promotion for exportation of all agricultural produces both raw material and processed goods in the international market. Ministry of agriculture should collaborate with the private sector to also promote homegrown produce locally as well. The government should strategize to revive/revamp all the collapsed state companies i.e. the pencil factor in Kumasi, everytime rice factory, sugar factory etc.

Conclusion

To increase the value of the cedi, the government needs to implement these recommendations and other suggestions made by other scholars to realize the objective. We cannot continue to govern the same way we have done and expect to see or experience a change in our economy and the lives of our people.

Ghanaians need an immediate solution to continuous fall of the cedi.